## Facts

- Sanchelima International, Inc. distributed dairy silos in Latin America.
- Walker Stainless Equipment Co., LLC manufactured dairy silos.
- In 2010, the parties executed a written distributor agreement governed by Wisconsin law.
- The agreement granted Sanchelima exclusive distribution rights for Walker silos in 13 Latin American countries, including Mexico, and provided Walker would not sell directly to third parties in the territory.
- The agreement contained (1) a limited-remedy provision and (2) a disclaimer excluding consequential damages, including lost profits.
- Walker nevertheless made direct sales in the exclusive territory: in 2014 (Mexico and Nicaragua), 2015 (Mexico), and 2017 (Mexico).
- Sanchelima treated the direct sales as breaches of the exclusivity promise, notified Walker, and sued for breach of contract seeking lost profits exceeding $600,000.
- After the dispute arose, Walker terminated the agreement without cause.

## Issues

1. Under Wis. Stat. § 402.719(2), did the agreement’s limited-remedy scheme, as applied to a breach of the exclusivity obligation, fail of its essential purpose and thereby permit UCC default remedies?
2. Under Wisconsin law, once a limited remedy fails of its essential purpose, is a contractual exclusion of consequential damages (including lost profits) still enforceable?

## Decision

- The Seventh Circuit affirmed the judgment for Sanchelima.
- The court held the limited-remedy provision failed of its essential purpose because it afforded no meaningful relief for breach of the exclusivity promise, a central part of the bargain.
- Applying Wisconsin precedent, the court held that when the limited remedy fails, the consequential-damages exclusion falls with it, allowing recovery of UCC consequential damages, including lost profits.
- The court upheld the district court’s damages award of $778,306.70, including lost profits, for Walker’s direct sales in the exclusive territory.

## Legal Principles

- Under Wis. Stat. § 402.719(2), if circumstances cause an exclusive or limited remedy to fail of its essential purpose, the aggrieved party may pursue UCC remedies otherwise available.
- A limited remedy fails of its essential purpose when it leaves the nonbreaching party without a fair and effective remedy for a material breach.
- Under Wisconsin law, failure of essential purpose can render contractual limits on damages— including exclusions of consequential damages under Wis. Stat. § 402.719(3)—unenforceable in the affected setting.
- Federal courts applying state commercial law must follow the state supreme court’s interpretation, even if other jurisdictions would separate a failed limited remedy from a consequential-damages waiver.

## Conclusion

The Seventh Circuit held that Walker’s direct sales in Sanchelima’s exclusive territory triggered Wisconsin UCC § 2-719’s failure-of-essential-purpose doctrine, which opened the door to UCC remedies and, under Wisconsin precedent, defeated the contract’s lost-profits exclusion, supporting the award of consequential damages for breach of exclusivity.


Sanchelima Int’l, Inc. v. Walker Stainless Equip. Co., 920 F.3d 1141 (7th Cir. 2019)